Vietnam Empty Office Towers Show Dreams Turned to Rubble

Residential and commercial buildings stand along the waterfront in Hanoi. Photographer: Justin Mott/Bloomberg

Nov. 26 (Bloomberg) -- From afar, the gleaming metal and
glass edifices of Hanoi’s EVN Tower illustrate Vietnam’s rapid
economic development. Up close, the rubble-strewn entrance and
missing windows tell another story: one of loose lending and
property speculation that now hangs over the country’s banks.

State-run monopoly Vietnam Electricity began construction
of the 33- and 29- story dual-tower development in 2007, a year
when 54 percent credit growth helped fuel the fastest economic
expansion since 1996. Now, the economy has slowed, banks are
struggling with an increase in bad debts, and unfinished
property projects, empty offices and lower rents risk adding to
the pile of non-performing loans.

“Banks were far too eager to lend and a lot of the
projects that have been built haven’t been well-thought
through,” said Stephen Wyatt, managing director for real estate
broker Knight Frank Vietnam in Ho Chi Minh City. “A number of
developments are on hold, purely because they have run out of
funding. Banks are no longer willing to fund these massive
developments.”

Vietnam’s economy, which the communist government opened up
in 1986, expanded at a 4.7 percent annual rate in the third
quarter, after exceeding 7 percent from 2002 through to the
first quarter of 2008. After a lending binge fueled the fastest
inflation in Asia, policy makers raised interest rates in 2010
and 2011, and restricted lending. Among the casualties are many
of the nation’s inefficient state-owned enterprises, which had
diverted cash to property developments.

“When the developer is a state-owned enterprise and is
using the money it should be using for say, power generation,
airlines, shipping or banking, that’s where the oversupply has
come,” said Marc Townsend, the Ho Chi Minh City-based managing
director of CBRE Group Inc.’s Vietnam unit. “They all felt they
could make easy money by being a property developer.”

Property Investments

State firms’ so-called non-core investments, such as
property and stocks, account for as much as 12 percent of their
registered capital, Deputy State Auditor Le Minh Khai said in
July. The Communist Party’s Central Committee on Oct. 15 called
on state-owned enterprises to end non-core investments.

Office and retail rents in Vietnam’s two largest cities
have slumped as a wave of supply entered the market at a time
when slowing economic and retail-sales growth curbs demand for
commercial real estate. The Hanoi market added more office and
retail space since the start of 2011 than in the previous four
years combined, according to property broker CBRE.

The average asking rent for top-grade central business
district office space in Hanoi was about $47 per square meter
per month in 2009, more than double the levels for the same
grade space in Bangkok and Kuala Lumpur at that time, according
to data from the Vietnam unit of Los Angeles-based CBRE. The
rate was 11 percent lower at $42.01 per square meter in the
third quarter.

Rents Plunge

Average asking rents for Grade B office space in the
capital’s western district, where some of the nation’s largest
state-owned enterprises have their headquarters, have fallen 39
percent since the first quarter of 2009, and slid 22 percent in
the city’s central business district, according to the data.

“I have never seen rents decline this fast in the
market,” said Son Nam Nguyen, managing partner at Vietnam
Capital Partners, an investment bank in Ho Chi Minh City. “If
real estate rents and values continue to decrease as we’ve seen
in the past three months and six months, the biggest risk is we
will see developers walk away from projects and banks’ bad
assets will increase very rapidly.”

Bad Debt

Real estate loans totaled 203 trillion dong ($9.7 billion)
as of Aug. 31, of which 6.6 percent were classified as bad debt,
Minister of Construction Trinh Dinh Dung told the National
Assembly on Oct. 31, citing a State Bank of Vietnam report. A
broader category of real estate-related loans, including
property-backed debt, account for 57 percent of total
outstanding borrowing, or about 1,000 trillion dong, he said.

Average office occupancy in Hanoi fell 2 percentage points
to 79 percent in the third quarter from the previous three-month
period, according to data from property broker Savills Plc,
while average rents dropped 4 percent. The number of new leases
signed in the period slid to the lowest this year.

Office occupancy rates in Ho Chi Minh City, the country’s
commercial hub, rose 1 percentage point to 87 percent in the
third quarter from three months earlier, while average monthly
rents fell 2 percent to about 540,000 dong per square meter from
the April-June period, with almost a quarter of buildings
lowering their rates, according to Savills.

Almost 16 percent of available Hanoi retail space was
vacant at the end of the third quarter, according to CBRE, with
most free space to be found in the capital’s shopping centers,
which had an occupancy rate of 82 percent.

Fringe Areas

“Newer projects, especially those in fringe areas, are
expected to experience a rather difficult time in the first two
or three years, due to fiercer competition and limited consumer
spending that might linger on,” CBRE said in its third-quarter
review of the Hanoi market. Almost 650,000 square meters (7
million square feet) of retail space is expected to enter Hanoi
from the end of the third quarter until the end of 2013, adding
pressure on existing projects, it said.

Retail-sales growth slowed to 17.1 percent year-on-year in
October compared with the same period in 2011, the lowest level
of expansion since at least January 2005.

The economic slowdown has weighed on the country’s stock
market, with the benchmark VN Index, Asia’s worst performer in
2011, down 23 percent since its peak this year on May 8. The
index fell 1 percent today.

Risks ‘Understated’

Many of Vietnam’s 1,300 state-owned enterprises are
reportedly facing losses because of their recent forays into
property, said Alfred Chan, director of financial institutions
at Fitch Ratings in Singapore.

“It is not obvious, if you were just to look at the
disclosure, what the potential risks to the banking sector are
if you just look at the real estate sector,” Chan said. “Some
of this exposure could well come from non-real estate companies
that have ventured into that sector.”

Non-performing loans at banks are “significantly
understated” and could be three or four times higher than
official estimates, Fitch Ratings said in a March report.

The central bank chief, Nguyen Van Binh, said in April the
level of bad debt at some lenders may be “much higher” than
reported. Bad debts in Vietnam’s banking system may have
accounted for 8.82 percent of outstanding loans at the end of
September, Nguyen Van Giau, head of the National Assembly’s
economic committee, told legislators in Hanoi Nov. 13.

Deserted Tower

Office rents may decline by as much as another 15 percent
in the next three years, said CBRE’s Townsend, particularly if
economic growth remains subdued and direct foreign investment
fails to recover. Pledged foreign-direct investment fell 25
percent from a year earlier in the first 10 months of 2012, the
Foreign Investment Agency said on its website Oct. 25.

On the bank of Ho Chi Minh City’s Saigon River, the
construction site for the 40-story Saigon M&C Tower is deserted
except for two security guards.

The $200 million project -- a joint venture between
Saigontourist Holding Company, M&C Joint Stock Company, Dong A
Commercial Joint Stock Bank and Dong A Bank Securities Co. --
broke ground in 2007 and was due to be completed in 2010,
according to Saigontourist’s website. Today, ropes dangle from
the first six floors, originally designed to incorporate a
23,000-square-meter commercial space, while glass paneling is
incomplete on the remaining floors.

“A lot of these developments were conceived and built in
an incredibly good market,” said Knight Frank’s Wyatt. “That
market is all but gone.”